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the economics of housing

Given the uncertainty clouding Canada's housing market, it's no surprise that the debate around whether to buy a home or rent has resurfaced.

As many readers know, I am quite bearish on the Canadian housing market, particularly a few of the larger cities and the condo segment. And although the numbers suggest renting has never been more appealing, there are considerations outside of financial ones that are important when considering your next move in the housing department.

Below are a few questions I'm frequently asked regarding whether it makes sense to buy now or rent for a while.

Q: If you are a current owner, does it make sense to sell now, rent for a while, and try to buy later at a lower price?

A: The current consensus is that Canada is in line for some sort of a soft landing involving prices falling gently, on average 5 to 10 per cent. My perspective is that a soft landing will be very difficult for policy makers to orchestrate given the degree to which the Canadian economy has been driven by this current boom.

But even assuming that prices do fall substantially over the next few years, timing the market is a difficult strategy to pull off simply because the transaction costs alone typically mean that prices need to fall at least 10 per cent to make the move profitable. And that still doesn't compensate you for the time and headache involved in moving twice.

There are only a handful of scenarios where it might make sense. Corrections in the housing market are always felt acutely by those who work in real estate-related industries – realtors, mortgage brokers, construction workers, etc. If you are barely keeping your head above water on the carrying costs of housing-related debt and if your income is reliant on the ongoing strength of the housing market, it could make a lot of sense to sell now and consider renting .

There are also times when an irrational market gives you a massive gift that's simply too good to let pass by. I recently met a person in Vancouver who bought a home in 2010, only to have another buyer a week later offer them $1-million more than they originally paid. In extreme cases like this, taking the windfall, investing it wisely, and using the income generated off that portfolio to pay for most of the rent on a comparable dwelling can make a lot of sense.

In parts of Canada where ownership costs command a substantial premium to rents (parts of Vancouver jump to mind), it's possible to sell your residence, rent a comparable dwelling, and pay rent with the income generated from an investment portfolio built on the proceeds of the home sale. This is, however, a very unusual situation and may present an interesting "arbitrage" opportunity , but it's certainly not without its risks.

Q: Should everyone looking at the housing market right now consider renting?

A: A number of recent articles have suggested that renting is currently a better option than owning a home, given the negative outlook on house prices and the fact that total ownership expenses are significantly higher than rental costs in a number of Canadian cities. From a purely financial perspective, yes, renting is a great option in many cities. But the reality is that monetary considerations are not the only ones at play.

Many families, particularly those with small or school-aged children, would prefer the stability of ownership and are willing to put their saved capital at significant risk and pay more to own rather than rent a comparable place where they may be forced to move at any time. Keep in mind that in some cities it can be difficult to find suitable rental dwellings, particularly for families looking for detached homes with multiple bedrooms and suitable backyards.

The decision to purchase a home in these scenarios is perfectly rational, provided potential buyers have a decent-sized down payment (10 per cent as a minimum), have stable jobs, are able to afford the home while still saving for other important goals such as retirement, and have stress-tested their finances in a rising rate scenario.

The bottom line here is that I believe most Canadians will be better served financially by renting a home in most Canadian cities at this point in the market cycle. But I'm fully aware that there is much more to consider than just the raw numbers.

Q: Are there certain markets in particular where it makes more sense to rent?

A: As a very general rule, when a house costs more than 200 times the monthly rent it generates, it starts to make a lot of financial sense to rent rather than own. While every Canadian market is different, there are certain areas where house prices and rents are so out of balance that first-time buyers would be wise to consider renting.

This becomes particularly compelling in areas where there is a well-stocked, stable rental market . This is, in fact, the case for condo markets in most large Canadian cities.

Many newer condos in Toronto and Vancouver command a purchase price that is over 300 times the monthly rent they generate. Once taxes and strata fees are factored in, the carrying costs of a fully-financed condo unit are substantially higher than renting a comparable unit, making renting an attractive option.

Despite some well-publicized anecdotes of rapidly-rising rents in parts of Toronto, the reality is that every measure of rental prices show muted gains in rents. Coupled with the fact that Toronto condo rental listings rose 25 per cent year over year in the first quarter, and the fact that there are nearly 60,000 condo units under construction in Toronto , the condo rental market will be well supplied and rents are unlikely to rise rapidly.

Most large Canadian cities currently have record high MLS condo listings and sales that are substantially lower than previous years, raising the likelihood that condo prices will fall. That makes it a perfect time for first time buyers to rent a condo and see how things play out over the next couple years.

The decision to buy or rent a home is never one-sided. Even "bearish" housing observers, like myself, recognize that there is more driving the decision than simple monetary considerations. That said, the numbers are tilted decidedly in favour of renting over buying, particularly in Canada's larger cities. For families who can find a rental that meets their needs, there have been few times when renting made this much financial sense.

Ben Rabidoux is a Canadian analyst and strategist with U.S.-based Hanson Advisors, as well as the author of The Economic Analyst blog.